Many times we have farmers come in to get their tax return prepared and tell us that they will probably not owe any tax since they sold some property at a large loss. After reviewing the facts with them, we find out they sold the property to their son. We then have to tell them that this loss is not deductible. This is not a pleasant thing to do.
Remember, if you sell property to a related party, which are:
- Parents and Grandparents
- Children and grandchildren
- A business that is more than 50% owned by you and your related relatives
If the person who you sell your asset to meets one of these definitions, then one of two things happen. If you sell the asset at a gain, you recognize the gain. However, if you sell the asset at a loss, the loss is not recognized. Any loss not recognized is added to the basis in the hands of the buyer and used when they sell it.
For example, assume a farmer buys some land for $100,000 and sells it to his daughter for $75,000. The $25,000 loss is not recognized, however, when the daughter sells it to an unrelated party for $90,000, she can take a $10,000 loss on the sale. If she sells it for $115,000, she only recognizes $15,000 of gain.
Anytime you are planning on selling assets to a relative make sure to review this with your tax advisor.